Russell Rebalancing Expected to Boost Recent IPOs

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Several recent high-profile initial public offerings (IPOs) could receive a boost as the family of FTSE Russell indexes are rebalanced at the end of June, on what has come to be one of the heaviest trading days of the year. Uber Technologies Inc. (UBER), Lyft Inc. (LYFT), Beyond Meat Inc. (BYND), and PagerDuty Inc. (PD), are all set to be added to the Russell 1000 index—which track’s the 1,000 largest U.S. companies—and any fund that tracks the Russell 1000. Despite all the buying pressure, upward movement for shares of struggling IPOs Uber and Lyft is likely to be muted, according to a Wall Street Journal report.

What It Means for Investors

The annual index rebalancing impacts more than $9 trillion in investor assets benchmarked to or invested in products that track the Russell U.S. indexes. This year’s realignment will see close to $1 billion pumped into newly-minted stocks from recent IPOs, as funds that track the Russell benchmarks will need to buy over $326 million worth of Uber stock, $93 million of Lyft, $67 million of Beyond Meat and $26 million of PagerDuty, according to Min Moon, a managing director at J.P. Morgan Chase & Co. quoted by the Journal. Another $400 million worth of 20 other recent IPOs will also be added to the Russell 2000 index, which is comprised of smaller companies. 

With such large sums of cash being shifted in and out of different stocks, prices tend to move around a bit as well. That’s why many traders try to get in front of these trades even before the announcements are made as to which stocks are to be added and which are to be removed by putting their bets in as early as May in anticipation of the moves. 

However, benefiting from such front running has become harder and harder as the trade has grown in popularity. “Through the last decade, more people came into this trade and that made it harder to front run,” Moon told the Journal. “People get in earlier and earlier.”

It’s not even clear how much the stocks of recent disappointing IPOs like Uber and Lyft will benefit from being added to the Russell 1000. Steven DeSanctis at Jefferies thinks the index rebalancing won’t have much of an effect on the shares of the two ride-hailing companies based on his calculations of the expected amount of buying pressure. 

He found that the amount of buying is likely to be less than one might expect based on the two companies’ respective market capitalizations, due to the Russell indexes use of a free-float rather than a full-market cap methodology in calculating the weighting of stocks. The free-float method uses market float—shares readily available for trading—rather than total number of shares outstanding, and for Uber and Lyft, their respective floats are 65% and 70% of the total number of their shares outstanding. 

DeSanctis concludes that the amount of buying pressure created from the rebalancing will be a fraction of the relatively high trading volumes of Uber’s and Lyft’s respective shares. Higher trading volume leads to higher liquidity, which will lessen the impact on the share prices of that relatively small buying pressure. “Given how much Uber and Lyft shares trade on a given day, it may not provide much of a lift,” said Mr. DeSanctis.

Looking Ahead

While the Russell indexes rebalance may provide a small short-term bounce to Uber, Lyft, and possibly others, the effect is likely to be limited. To give their shares a more long-lasting boost, the two ride-hailing companies will have to convince investors that they have clear paths to brining in sustainable profits.

Source: Investopedia

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